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Tax Facts for Small Business Owners

25 October, 2021

If you own a small business, sole proprietorship, or file a Schedule C at tax time, it's important to be aware of a few, basic tax facts. For instance, all income is considered taxable unless there is a specific law that exempts it. Second, there are hundreds of deductions you can take from what your company earns. They represent legal ways to lessen the sting of what you must pay on your income, provided you keep good records and stay within the rules when deciding what constitutes a valid deduction. What should every owner know about taxation? Here are key points to ponder if your run your own small business.

Standard Taxation Rates Vary

On average, people who own small businesses pay between 13 and 20 percent in taxes, based on many different factors and situations. But one thing is universal for self-employed owners. It is legally necessary to pay your share of social security tax, which means an added 15.3 percent self-employment tax on whatever your business bottom line profit is.

Selling Your Life Insurance Policy Can Generate Income

As an independent owner-entrepreneur, you can sell personal goods and invest the proceeds into your company. One way many startup owners generate extra working capital is by selling their personal life insurance policies for cash via a process called a life settlement. You can check out the particulars online by reviewing a simple guide. It covers everything you have to know about how the proceeds are taxed. That way, before you can sign on the dotted line, you'll know all the essential points.

In general, when you sell a policy, you'll get a cash payout that is less than the death benefit but more than the stated cash surrender value of the policy. Keep in mind that in most cases, your basis in the policy (what you've already paid in) is not taxed at settlement. But any amount you receive above basis, but below the cash surrender amount is taxed as ordinary, personal income. Finally, what about amounts that exceed the cash surrender? They're taxed at your capital gains rate. The review guide explains all the details and give illustrative examples of scenarios.

Meals and Travel

As long as a business meal is directly related to what you do, and if you record the relationship you have with others at the event, the time, the location, and total cost of the food, you are usually able to deduct 50 percent of the bill as a business-related expense. Travel costs are often 100 percent deductible as long as you need to stay overnight in a city in which you do not currently reside. Plus, the entire purpose of the trip must be directly connected to your company's pursuit of earning a profit from ordinary operations. In other words, there can be no personal aspects to the trip.


The general rule for car use is that you can fully deduct all expenses for a vehicle you use for company purposes. But, if you are like many others and use your personal car for occasional business-related tasks, you can claim a 54.5 cents-per-mile deduction on your company filing.


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